US-Israeli economic tie expected to mount with more aid, free trade

By
David R. Francis, Staff writer of The Christian Science Monitor /
October 25, 1984

When most debtor nations get into a severe balance-of-payments problem, they go to the International Monetary Fund (IMF) for a loan. If the loan is relatively large, the IMF will specify ''conditions'' that must be met to get the loan - usually some form of domestic austerity aimed at improving the nation's trade balance.

Israel, with around $24 billion in external debts (probably the highest per capita of any nation) and facing drastic international-payments difficulties, sought help this month from the United States. Thereby it avoided IMF ''conditionality.''

Herbert Stein, chairman of former President Nixon's Council of Economic Advisers, and one of four outside advisers to Secretary of State George Shultz on US-Israeli economic relations, says, ''The answer is 'no.' That is not the nature of the relationship. They understand what they have to do. They have to make up their minds independently.''

Another informed source figures Israel will get more aid - Prime Minister Shimon Peres has hinted it will be something like $4 billion for fiscal 1986, up from $2.6 billion this year - as long as the country makes ''a serious attempt'' to deal with its economic problems.

Both Israeli and American officials are scheduled to discuss Israel's economic difficulties and US aid at a meeting of a special joint committee starting tomorrow.

Probably well before those discussions are finished, the US and Israel will agree to form a free-trade area. During Mr. Peres's visit to Washington this month, President Reagan said he wanted the deal complete within 30 days. Danny Halperin, economic secretary at the Israeli embassy, said negotiations on a free-trade agreement are to resume early next month ''to try to hammer it down.''

With its massive federal budget deficit, the United States has limited ability to increase its aid to Israel. The offer of a free-trade area, noted Harald Malmgren, a trade consultant, ''was something (the administration) could do. It is a political gesture also.''

Congress gave authority to the administration to negotiate a free-trade area with Israel in an omnibus trade bill passed late Oct. 9. choPresident Reagan and Prime Minister Peres had planned to mark the legislative authority with a small ceremony that day. But Congress acted too late in the day, and presidential campaigning and the Jewish holidays prevented it from taking place later during the visit.

Mr. Malmgren, a former high US trade official, says the free-trade deal will be contrary to longstanding American trade policy. In the postwar years the US has followed a multilateral, most-favored-nation (MFN) policy, whereby trade concessions granted one nation were automatically extended to all nations with MFN status. The Israeli-US deal will be bilateral, with Congress having noted that such trade concessions should not be extended to other nations.

Under Article 24 of the General Agreement on Tariffs and Trade (GATT), two or more nations may form a free-trade area if substantially all trade barriers between the nations are removed within a reasonable period of time.

Although the US and Israel have not fully agreed on the schedule for dismantling trade barriers, US trade officials say the deal will comply with GATT requirements. Trade restrictions will be removed over 10 years, and it is expected cover the bulk of tariffs and other types of barriers, such as quotas, standards, buy-domestic provisions, and so on. The deal will also cover agricultural products, services, and investment.

Israel also has a free-trade arrangement with the European Community, but it does not cover so broad an area.

Last year the US imported $1.3 billion in products from Israel. About 90 percent of these entered duty-free, because either the MFN tariff rate was zero or the product qualified under a special concession designed for developing countries called the Generalized System Preferences (GSP).

Israel has a much higher standard of living than most countries regarded as ''developing,'' but it was given GSP as a reward for helping push a major trade bill through Congress in 1974, said Mr. Malmgren, then with the Office of the Special Representative for Trade. ''I needed their support,'' he recalled. ''Israel's lobby is very powerful.''

Some 40 to 45 percent of US exports to Israel, $1.7 billion in 1983, excluding military shipments, face duties that run around 10 percent on average.

''Clearly, we stand to gain'' from a free-trade area, says Robert E. Lighthizer, deputy US trade representative.

From Israel's standpoint, the trade deal will open up the whole US market for its exports. Various trade obstacles, said Mr. Halperin of the Israeli embassy, now keep out some Israeli products.

Just as important to Israel, however, the free-trade area should encourage investment there. That Middle East nation will be able to tell potential investors that it is in the unique position of having a free-trade area with the world's two largest markets, the US and the European Community.

The agreement on free trade in services will also be unique, an area that the US would like see covered in a future trade round with many countries under the GATT umbrella. The deal with Israel will reportedly include communications, banking services, general financial services, transportation, travel and tourism , construction and engineering, accounting, services in the medical, education, legal, and management-consulting area, computer services, motion picture production, and advertising.

The elimination of barriers in services, however, which often involve state laws and regulation, may not be possible in every instance and will take time, the experts say.